(Editor's Note: Our "Risky Credits" series focuses on corporate issuers rated 'CCC+' or lower in emerging markets. Because many defaults are of companies in these categories, ratings with negative outlooks or on CreditWatch negative are even more important to monitor.)
Key Takeaways
- The number of issuers rated 'CCC+' and lower decreased to 16 as of December 2023, from 17 as of September 2023. Risky credits now constitute 11% of the speculative-grade universe in emerging markets.
- In the fourth quarter of 2023, the pace of defaults in emerging markets was lower than that in the U.S. and Europe. Downward transition risk remains pronounced, with the ratings on 88% of issuers rated 'CCC+' and lower on a negative outlook or on CreditWatch negative.
- Financing conditions improved slightly on the back of the recent positive market sentiment toward the Fed. Yet, borrowing costs remain tight, constrain speculative-grade issuers' access to foreign markets, and render refinancing options on average 3x more expensive, compared with the coupon rates at the time of the initial issuances.
The number of emerging markets issuers rated 'CCC+' and lower slightly decreased to 16 in the fourth quarter of 2023, from 17 in the third quarter. The proportion of emerging markets speculative-grade issuers rated 'CCC+' and lower remained unchanged at 11% in December 2023, compared with September 2023 (see chart 1).
- We downgraded Mexican leasing company Operadora de Servicios Mega, S.A. de C.V. SOFOM, E.R. to 'CCC+' from 'B' because of its strained liquidity position and high refinancing risk. The outlook on the rating is negative.
- We also downgraded Hungarian chemical company Nitrogenmuvek Zrt. to 'CCC+' from 'B'. This is because a newly introduced carbon tax led to lower EBITDA generation and an unsustainable capital structure, while high interest rates and low economic growth increased refinancing risk.
- We upgraded South African power utility ESKOM Holdings SOC Ltd. (Eskom) to 'B' from 'CCC+'. This is because of extraordinary support from the South African government through the Eskom Debt Relief Act, which provides financial support to cover Eskom's debt servicing and repayment obligations until March 2026.
- We withdrew our 'CCC-' issuer credit rating on Chilean utility company Guacolda Energia S.A.
Chart 1
Unlike in the U.S. and Europe, the pace of defaults in emerging markets decreased in the fourth quarter of 2023. The decreasing number of defaults in emerging markets follows gradually improving economic conditions as inflationary pressures ease and financing conditions improve. Investors' risk appetite for emerging markets is growing, given more clarity about interest rate paths--both domestically and abroad--and expected rate cuts in 2024. The latter allowed for some refinancing in the fourth quarter of 2023. Two of the 16 defaults that happened in emerging markets in 2023 occurred in the fourth quarter. We downgraded:
- Chemical company Unigel Participacoes S.A. to 'D' from 'CCC-' on a missed interest payment after a 30-day grace period; and
- Infrastructure group Investimentos e Participacoes em Infraestrutura S.A. - Invepar to 'D' from 'CCC-' on distressed debt exchanges after the restructuring of its third and fifth local debentures. We subsequently upgraded the group to 'CCC+' as the completion of the debt restructuring eased short-term liquidity pressures. Yet, financial risks will remain high over the next few years.
Negative bias remains high. 88% of issuers rated 'CCC+' and lower were on negative outlook or CreditWatch negative in the fourth quarter of 2023, up from 76% in the third quarter (see chart 2). This means the risk of downward transition is high. The only two issuers that were not on negative outlook or CreditWatch negative were real estate companies Kawasan Industri Jababeka Tbk. PT and Grupo Gicsa S.A.B. de C.V. The outlook on both is stable. 13 of the 14 companies on negative outlook are located in Latin America, with nine of them in Argentina.
Chart 2
After the upgrade of Eskom, the aggregate debt from issuers rated 'CCC+' and lower dropped to $7.4 billion in the fourth quarter of 2023, from $12.0 billion in the third quarter. Argentina has the highest debt concentration, with $6.3 billion and nine issuers on negative outlook (see chart 3). The oil and gas sector tops the risky credits cohort, with YPF S.A. and Compania General de Combustibles S.A. accounting for $3.2 billion of debt (see chart 4).
Chart 3
Chart 4
Speculative-grade issuance increased in the fourth quarter of 2023 but lost steam, compared with the beginning of 2023. Continuously tight financing conditions mean borrowing remains particularly challenging for lower-rated issuers. International public finance issuances in emerging markets benefited from the market's expectation that the Fed will introduce rate cuts. Yet, this does not apply to corporate risky credits. The latest issuance from a company rated 'CCC+' and lower dates back to November 2021. Even though the risky credits index, which reflects risky credits' yields to maturity, reached the prohibitive level of 20% in January 2024 (see chart 5), it is worth noting that yields on bonds issued by 67% of the companies included in the index declined over the past two months.
Chart 5
Key Questions
What if risky credits use the current window of opportunity to refinance their debt?
If companies refinanced their debt, the average refinancing costs could be thrice as high as the coupon rates at the time of the initial issuances (see chart 6). In the case of Argentine infrastructure management and development company CLISA-Compania Latinoamericana de Infraestructura & Servicios S.A. (CLISA) and Mexican leasing company Operadora de Servicios Mega, S.A. de C.V. SOFOM, E.R. (Operadora), refinancing costs could exceed original coupon rates by 10 times. We recently downgraded CLISA to 'CC' from 'CCC-' on an exchange offer considered as equivalent to a default. Operadora experiences increased pressure on its liquidity position and suffers from restricted access to unsecured funding, as well as challenging financing conditions. Nonetheless, these two companies account for only 10% of the risky credits cohort's debt. Refinancing costs are lower for companies that have higher outstanding debt amounts, including Argentine energy companies YPF S.A. (1.6x) and Pampa Energia S.A. (1.3x).
Chart 6
How big of a problem is the maturity wall?
80% of companies that are rated 'B-' and lower and will face debt maturities over the next two years are located in Latin America (see chart 7). The maturity wall is highest in the oil and gas sector, with $1.3 billion, followed by homebuilders with $0.8 billion (see chart 8). In the risky credits cohort, YPF S.A. and Operadora take the lead, with debt of $1 billion and about $0.5 billion, respectively, maturing in 2025.
Chart 7
Chart 8
How will the financial ratios of the risky credits cohort develop?
Financial ratios have not moved consistently over the fourth quarter of 2023 (see charts 9-11).
Hungarian chemical company Nitrogenmuvek Zrt.'s EBITDA generation will increase over 2024-2025 because of higher sales volumes after negative free operating cash flows in 2023. The increase will improve the company's leverage. Yet, we expect that leverage will remain very high at about 10x in 2024 and exceed 10x in 2025. Our expectations are subject to fluctuations in selling prices, realized sales volumes, planting seasons, demand evolution, and natural gas prices.
We reviewed our forecast for Chilean casino operator Enjoy S.A. in October 2023. We now estimate the company ended 2023 with a leverage of 30x and expect an interest coverage ratio below 1x through 2025. Liquidity will be strained over the same period, with negative funds from operations. These fundamentals were at the core of the recent downgrade to 'D' from 'CCC-' on Jan. 31, 2024.
Argentine telecommunications company Telecom Argentina S.A. increased its interest expense considerably in 2023 because of the depreciation of the Argentine peso. Most of the company's debt is denominated in U.S. dollar, while cash flows are denominated in the domestic currency. Our current forecast includes contained leverage, as well as an improvement in the company's interest coverage ratio and liquidity over 2024-2025. These improvements could be challenged if currency depreciation exceeds inflation significantly and triggers an increase in debt and interest expenses that surpasses cash flows. A recession constitutes another downside scenario, with revenue and EBITDA significantly lagging inflation.
Chart 9
Chart 10
Chart 11
Table 1
| Issuers rated 'CCC+' and lower in emerging markets | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Industry | Company | Rating | Outlook/CreditWatch | Outlook or CreditWatch | Country | Region | ||||||||
| Bank |
Banco De Galicia Y Buenos Aires S.A.U. |
CCC- | Negative | Outlook | Argentina | Latin America | ||||||||
| Financial institutions |
Operadora de Servicios Mega, S.A. de C.V. SOFOM, E.R. |
CCC+ | Negative | Outlook | Mexico | Latin America | ||||||||
| Capital goods |
CLISA-Compania Latinoamericana de Infraestructura & Servicios S.A. |
CCC- | Negative | Outlook | Argentina | Latin America | ||||||||
| Chemicals, packaging, and environmental services |
Nitrogenmuvek Zrt. |
CCC+ | Negative | CreditWatch | Hungary | Eastern Europe, Middle East, and Africa | ||||||||
| Media and entertainment |
Enjoy S.A. |
CCC- | Negative | Outlook | Chile | Latin America | ||||||||
| Telecommunications |
Telecom Argentina S.A. |
CCC- | Negative | Outlook | Argentina | Latin America | ||||||||
| Homebuilders/real estate |
Kawasan Industri Jababeka Tbk. PT |
CCC+ | Stable | Outlook | Indonesia | Asia-Pacific | ||||||||
| Homebuilders/real estate |
Grupo Gicsa S.A.B. de C.V. |
CCC+ | Stable | Outlook | Mexico | Latin America | ||||||||
| Oil and gas exploration and production |
YPF S.A. |
CCC- | Negative | Outlook | Argentina | Latin America | ||||||||
| Oil and gas exploration and production |
Compania General de Combustibles S.A. |
CCC- | Negative | Outlook | Argentina | Latin America | ||||||||
| Transportation |
Gol Linhas Aereas Inteligentes S.A. |
CCC- | Negative | Outlook | Brazil | Latin America | ||||||||
| Transportation |
Aeropuertos Argentina 2000 S.A. |
CCC- | Negative | Outlook | Argentina | Latin America | ||||||||
| Transportation |
Investimentos e Participacoes em Infraestrutura S.A. - Invepar |
CCC+ | Negative | Outlook | Brazil | Latin America | ||||||||
| Utilities |
Empresa Distribuidora Y Comercializadora Norte S.A. |
CCC- | Negative | Outlook | Argentina | Latin America | ||||||||
| Utilities |
CAPEX S.A. |
CCC- | Negative | Outlook | Argentina | Latin America | ||||||||
| Utilities |
Pampa Energia S.A. |
CCC- | Negative | Outlook | Argentina | Latin America | ||||||||
| Data as of Dec. 31, 2023. Source: S&P Global Ratings. | ||||||||||||||
Emerging markets include Latin America: Argentina, Brazil, Chile, Colombia, Peru, Mexico; Emerging Asia: India, Indonesia, Malaysia, Thailand, Philippines, Vietnam; Europe, the Middle East, and Africa: Hungary, Poland, Saudi Arabia, South Africa, Turkiye; Greater China: China, Hong Kong, Macau, Taiwan, and red-chip companies (issuers headquartered in Greater China but incorporated elsewhere).
Related Research
- Global Financing Conditions: Cautious Optimism After Peak Rates, Jan. 25, 2024
- Emerging Markets Monthly Highlights: Red Sea Tensions Hinder Disinflation, Jan. 18, 2024
- Corporate Defaults Jumped 80% In 2023 To 153, Jan. 16, 2024
- Credit Conditions Emerging Markets Q1 2024: Not Getting Easier, Nov. 28, 2023
- Risky Credits: Emerging Markets Hang In Balance, Nov. 1, 2023
Related Rating Actions
- Enjoy S.A. Ratings Lowered To 'D' On Judicial Reorganization Filing, Jan. 31, 2024
- Argentine Conglomerate CLISA Downgraded To 'CC' From 'CCC-' On Consent Solicitation; Outlook Negative, Jan. 14, 2024
- Nitrogenmuvek Downgraded To 'CCC+' On High Carbon Tax Burden; Placed On CreditWatch Negative On Refinancing Risks, Dec. 1, 2023
- South African Electricity Producer Eskom Upgraded To 'B' On Revised Government Support; Outlook Stable, Nov. 24, 2023
- Operadora de Servicios Mega Downgraded To 'CCC+' On Terminated Debt Exchange Offer; Outlook Remains Negative, Nov. 15, 2023
- Unigel Participacoes S.A. Downgraded To 'D' From 'CCC-' On Missed Interest Payment After Grace Period, Nov. 2, 2023
- Brazilian Infrastructure Group Invepar Upgraded To 'CCC+' From 'D' On Debt Restructuring Conclusion; Outlook Negative, Nov. 1, 2023
- Brazilian Infrastructure Group Invepar Downgraded To 'D' From 'CCC-' On Distressed Debt Exchange, Oct. 25, 2023
This report does not constitute a rating action.
| Primary Credit Analyst: | Luca Rossi, Paris +33 6 2518 9258; luca.rossi@spglobal.com |
| Secondary Contact: | Jose M Perez-Gorozpe, Madrid +34 914233212; jose.perez-gorozpe@spglobal.com |
| Research Contributor: | Nivedita Daiya, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
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